Northern Rock Bid: The Clock Is Ticking
Anyone interesting in bidding for Northern Rock, the stricken mortgage bank, needs to stabilise the business before the Government would have to withdraw its £28bn guarantee to savers and halt the Bank of England's emergency loans amounting to £13bn. It has come to light that under the rules of the European Commission underwriting customer deposits comes under the heading of 'rescue aid' and as such can only continue for six months. When the guarantee is removed there will no doubt be a fresh flood of savers banging at Northern Rock's doors to withdraw their cash.
Last week's hot topic was the possibility of a bid by a consortium led by Virgin Group chief Richard Branson. The consortium, which includes a number of global finance groups and leading hedge funds, has made some opening moves by talking to the Treasury and advisers to Northern Rock over access to finances for a rescue package. It is unlikely that the financial authorities will object to a Virgin bid.
The Virgin consortium is also believed to have been in touch with US investment bank Citi, which is currently advising Northern Rock, and is helping to co-ordinate a £20bn package of loans to support any rescue bid for the ailing bank.
Backing for the consortium comes from US insurance group AIG, Wilbur Ross, an American buyout veteran, British hedge fund ToscaFund Asset Management and First Eastern, as Hong Kong investment group.
A number of other bidding groups are also believed to be in collaboration, including National Australia Bank, which owns Yorkshire Bank and Clydesdale Bank, and Barclays Capital, the investment banking arm of the High Street giant.
Virgin's scheme would see Branson combine his Virgin Money business with Northern Rock, together with an injection of capital. For this, the consortium would be issued with new shares, making it 30% to 50% of the business. The new entity would be called Virgin Money, and the new chief executive would be Jayne-Anne Gadhia, current head of Virgin's finance business.
Labour MP for Newcastle Upon Tyne Central gave the proposals a cautious welcome. His constituency is where many of Northern Rock's 6,000 staff live, and he is also part of the Treasury Committee. He said: "It would keep Northern Rock as an independent company, based in Newcastle and listed in Britain and would secure the link with the Northern Rock Foundation. On that basis it appears to meet several of the most important requirements, but obviously we will have to see the detail."
Northern Rock has had its deposits underwritten by the Treasury, and it has had to borrow nearly £13bn from the Bank of England at a high rate of interest as other loans ran dry. The interest rate is at least 1% over the standard market rate. It is believed that Northern Rock is paying around £150m in payments for the privilege of borrowing from the Bank and for the Government guarantee.
The City is gaining confidence for a positive outcome, however. Northern Rock shares jumped 72% to 273¼p last week.
Published on October 19, 2007
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